As the 2023 fiscal year gets off to a running start, asset management firms face increasingly acute ramifications of risky data management practices. News sources continue to pump out weekly articles headlining immense fines and reputation hits due to compliance issues within some of the most well-known firms.
In November of 2022, the SEC charged Goldman Sachs Asset Management (GSAM) for failing to properly regulate and enforce its policies and procedures involving Environmental, Social, and Governance (ESG) investments (https://www.sec.gov/news/press-release/2022-209). This ended up costing GSAM a $4 million penalty.
The Securities and Exchange Commission had a record year in 2022, filing 760 enforcement actions and recovering $6.4 billion in penalties and disgorgement on behalf of investing public (https://www.sec.gov/news/press-release/2022-206). Given the huge fines at stake along with the vigilant crackdown efforts of the SEC, the accuracy of OMS rule libraries will prove a particular vulnerability this year.
Automated trade monitoring, through pre-trade and post-trade compliance systems, has become an essential tool used by Compliance teams to ensure adherence with regulations and client mandates. These automated libraries house thousands of rules that fire throughout a given day checking individual trades and calculating firm-wide exposure. Most firms so depend on the automation that the critical task of updating their OMS Rule libraries regularly to ensure the automation produces accurate results gets waylaid on the priority list.
For our 2023 focus on protecting our clients, we have devised 4 tell-tale signs should trigger a comprehensive rule review of your OMS Rule Library. This avoids costly mistakes due to outdated, missed, or misinterpreted requirements languages in IMAs, addenda, and other rule compliance documents.
Outdated or inaccurate rules can wreak havoc on a compliance system’s ability to ensure firm-wide requirements get fully covered in order to prevent risk. Frequently when firms become reliant on their OMS system without regularly scheduled updates, “drift” occurs. “Drift” occurs when the rule coding begins to “drift” away from its original intention as mandates get re-interpreted, data changes occur, and industry regulations get updated.
Your testing lacks the robustness to capture each full requirement through a positive and negative test compilation. The earliest phase of testing at IMP involves unit testing. The unit test ensures a requirement is being accurately enforced by one or more rules. By extension, this ensures that the rule(s) are mathematically correct, and the code includes the appropriate parameters.
Each unit test at IMP includes a “positive” and “negative” test. A positive test confirms that the violation is triggered properly when the requirements of the rule are met, while in contrast the negative test ensures a rule is not falsely triggered. Not conducting a negative test runs the risk of the rule restricting more than intended.
Without experience and knowledge within the rule coding team, your firm faces risk through the inability to accurately understand all the full requirement language. In order to write consistent code that meets both OMS coding and document language, your firm needs a designated coding team.
Bulk closing, commonly used as a workaround method when testing trades in the front-end, runs the risk of ignoring real positive violations. In theory, the functionality allows the closure of single or multiple false positive violations that can disrupt and create a bottleneck in other workflows. However, without closer acknowledgement, a genuine positive violation can easily get lost in the mix.
If you have any of the above signs within your firm’s practices, you urgently need to refresh your OMS Rule Library! IMP consultants stand by with our experience in all the market-leading systems and can restore your compliance system back to its prime efficiently with the help of our CLEAR Compliance™ Platform.